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Thursday, March 5, 2015

Building the Defensive Moat Rather Than Cleaning Up the Castle?

Yesterday's DealLawyer.comDealLawyer.com helped me uncover this set of information from FactSet on poison pills issued last year. Before we get too excited about the graph, let's remember that we're dealing with just 18 observations here. Still it is interesting that a new rationale for pills is added in a few firms - protecting Net Operating Losses. While these losses are indeed a valuable asset, it is ironic that they would be protected through a poison pill. Indeed, poison pills are designed to prevent hostile acquisitions. Hostile acquisitions, of course are often motivated by a belief that additional value can be created at the firm, like... for example... when a firm is experiences losses!

Paul Malatesta and I did the first academic analysis of poison pills beginning our study during the winter of 1985. At the time only 14 existed! In November of 1985, however, the courts upheld the legitimacy of the pill in the Household International decision. By early 1986 our sample had increased to over 100 firms. By the end of that year over 300 existed. By the end of that decade, pills were ubiquitous.

In our initial study, we found that firms issuing pills were less profitable than the firms in their industry. Wealth losses of 2-4% were experienced when the pills were announced. In addition, the CEOs of these firms had lower stock ownership positions than the CEOs of firms not issuing pills. Hence they had less to gain from the bid premia and much to lose from a hostile bid (their jobs). We haven't analyzed the current set of pills, but see our post on Netflix and the poison pill.

About MergerProf

In addition to their day jobs, Joe and Ralph teach acquisition finance at the Amsterdam Institute of Finance. This blog was created in the summer of 2012 as a tool for those interested in acquisition finance and related material. Admittedly, we define related material broadly to include mergers, private equity, banking, governance, deal making and, well, finance in general. We hope you will enjoy and contribute, critiquing, expanding and providing your own examples related to the posts. We encourage you to join us in this adventure and, for some of you, to see you in Amsterdam, New York or Philadelphia.